the right way to invest blog
Here’s a short video explaining why we don’t chase performance. Chasing performance would be looking back at which mutual funds had great years and then investing in those mutual funds thinking [hoping] their great performance would continue. Most times this isn’t the case, and at least not enough to even make this a sensible investing strategy. There’s good evidence to support chasing performance doesn’t win in the end, but what does win the end is diversification, low-cost, and patience.
DFA, the mutual fund company in which our clients' money is invested, has put together a presentation titled Pursuing a Better Investment Experience. It highlights 10 key decisions that can help investors target long-term wealth building strategies. The linked PDF offers a very clear and concise explanation of these 10 key decisions. There is also some additional information about each topic to read by hovering over the conversation bubble in the top left corner.
I especially like Item 8. Manage Your Emotions on page 9 and Item 10. Focus on What You Can Control on page 11. Part of our job is to manage your investing and retirement emotions. We don’t want our clients to get too high (“elation”) or too low (“fear”) as they journey through life towards a safe, secure and comfortable retirement. In doing this we focus on what we can control: creating an investment plan, diversifying, keeping expenses low while minimizing behavior that increases taxes, and staying focused and disciplined through the markets ups and downs.
For most quarterly reports I like to draw your attention to the article included at the end of the report, this time around the article is one I sent out two months ago. Why would you have not read it then 😊, but just in case you missed it, you can check out the article and my take on it here.
Also, a page included in every quarterly report is the ‘World Stock Market Performance” that can be seen on page 4. You can see major headlines from around the world…good, bad, and indifferent. Do these headlines explain market performance? Maybe, maybe not. Most often we don’t truly know what makes a marker go up a few points today and down a few points the next, but it is important to remember these headlines remind us to view daily events from a long-term perspective and to avoid making long-term investment decisions based on short-term headlines.
“In many cases, the reason for saving today is to support future spending. Therefore, keeping pace with inflation is a crucial goal for many investors.”
What is inflation and how do we keep pace with it, or even outpace it?
This short DFA article answers those questions.
Remember when your parents said, “when I was your age, milk cost a ____!” They were probably right! In 1916 a quart of milk cost 9 cents. Now 9 cents would buy you about 7 tablespoons of milk. This is an example of inflation. Inflation erodes our purchasing power; it’s why we typically can buy less of something in the future with the same amount of money we have today. On the bright side, inflation should also increase the size of our paychecks, the value of our home, and the value of our investments.
The money we are saving today to support our future spending is slowly being eaten away by inflation every year. We need cash on hand to live and to have some set aside for emergency purposes, but beyond that we need to protect our money from inflation eating it up. Over time, owning stocks have shown to be a great means towards outpacing inflation (see graphic below), therefore it is imperative we do two things with our retirement accounts:
There is no guarantee stocks will keep up with or outpace inflation, but we do know that if inflation exists our money will go down in value – our dollar will still be a dollar, but it will buy less of something in the future – so we put measures in place that might be able to curb the effects of inflation and grow our wealth over time.
What does e + r = o mean? I’ve never heard of it. It’s the idea that highly successful people focus on influencing outcomes by controlling their reactions to events, instead of trying to control the events themselves. e + r = o means “Event + Response = Outcome.”
When it comes to investing, a lot of events are out of our control anyway. Events like bull markets, bear markets, political turmoil and economic instability. So how do we, as investors, influence control of our reactions to these events, events which are outside of our control? We do so by having a clearly defined investment philosophy. Market events are out of our control, but our response to them can be controlled. And our investment philosophy prepares us for when these events occur to be proactive and not reactive with our retirement portfolios, allowing us to filter out short-term noise while focusing on long-term outcomes.
You can read this DFA article for more information.
Michael Pensinger, CFP® is Owner and President of Pensinger Financial, Inc.
He grew up in Park Forest, Illinois and now resides in Lemont, Illinois with his wife, two children, and two dogs. Michael serves as Treasurer on the Lemont Area Chamber of Commerce Board of Directors and he volunteers for the Lemont Open Space Committee. Read More